IFS warns over Budget pension changes

The Momentum UK Team 20 March 2014

The changes to pensions announced yesterday by George Osborne represent “one of the biggest shake ups seen in a long time” according to the Institute for Fiscal Studies (IFS).

Many of the proposals announced in yesterday’s Budget statement have today faced closer scrutiny, including the changes to the pension system. From 2015, people reaching retirement age will be able to use their pension pots however they choose, rather than having to buy a fixed regular income - usually in the form of an annuity. Today the IFS warned that the new scheme could create “losers”.

Osborne said in the Budget statement that the new scheme would increase government revenues in the short term, as more people will be able to take taxable income from their pension pots. This is based on an assumption that 30% of people in defined contribution pension schemes will want to take out their pension at a faster rate than through an annuity.

Paul Johnson, director of the IFS, cast doubt on the scheme, claiming that it “depends on highly uncertain behavioural assumptions about when people take the money” and may not be good value for the government in the long term. According to calculations made by the IFS, the increased tax receipts will peak in the year 2018/19 before declining again. They claim that in 20 years the policy will actually be increasing the deficit.

It is thought that this policy comes in response to dissatisfaction with the annuity market, with some claiming that they aren’t good enough value for money. However, Johnson raised concerns over the future of the market under the new scheme:

“It will likely make annuities even more expensive for those who do want to buy them.

“The market will become much thinner and there will be greater levels of adverse selection - only those expecting to live a long time will want to buy an annuity, thereby driving up the price.

“There is a market failure here. There will be losers from this policy.”